Occupational Choice, Incentives and Wealth Redistributions with Scarcity of Capital

Abstract

In a matching model of firm formation with moral hazard, we characterize the equilibrium for economies with scarcity of capital and study the effects of redistributive taxation. We give necessary and sufficient conditions determining the equilibrium matching patterns, payoffs and interest rate. These depend only on aggregate wealth and the median wealth relative to the active population, compared to setup costs and technological parameters. We confirm previous results, showing that monotonic job specialization typically obtains when incentives are asymmetric within firms. Redistributive taxation now propagates its effects through the asset market and there may wealth nonmonotonic interest groups over median changes.Incentive; wealth distribution